Global bond markets stuck in lateral mode as global politics, fiscal changes trigger uneven trading

Global bond markets are stuck moving sideways as global politics and fiscal changes trigger uneven trading.

Let’s start with Japan, where volatility is building after Sanae Takaichi secured her election win, and the tremors are hitting debt markets far beyond Asia, according to Goldman Sachs.

Traders are trying to keep pace with swings in yields across the U.S., Europe, and India, while risk assets run higher in the background.

Goldman strategists led by Bill Zu said in a note that every 10 basis point “idiosyncratic JGB shock” could push U.S., German, and UK yields up by two to three basis points. They warned that moves in Japanese bonds have already foreshadowed global counterparts this year, with spikes in super-long notes fueled by anxiety over swelling deficits.

Japan election win drives rally across sovereign bond yields

Japan’s 40-year bond yield jumped 14 basis points on Monday. Traders expect Takaichi’s pro-stimulus policy to trigger more debt sales aimed at covering household tax cuts and supporting the economy.

That reaction spilled into global markets as U.S. and New Zealand sovereign yields climbed two to three basis points. Canadian and German bond futures fell at the same time. Goldman’s note made clear that whether this long-end selloff sticks will depend on political steps taken next in Tokyo.

A 30-year bond auction scheduled for Tuesday is expected to test investor demand for Japanese government paper. A weak sale could reveal limited appetite and fuel more volatility. Markets are watching closely because earlier this year, super-long Japanese yields surged and dragged global bonds with them.

The U.S. market is also under pressure. At 5:35 a.m.ET Monday, the 10-year Treasury yield gained over 2 basis points to 4.148%, the 30-year yield rose more than 4 basis points to 4.755%, and the 2-year yield edged higher to 3.580%.

The increases came as the U.S. government shutdown continued and traders monitored signs of economic weakness under President Donald Trump’s administration.

In Europe, French bonds took a beating after Prime Minister Sebastien Lecornu resigned. The yield on 10-year notes jumped 11 basis points to 3.61%, pushing the premium over German bonds to more than 89 basis points, the widest spread seen this year and close to the 90-point high hit in 2012.

The euro dropped 0.7% against the dollar, and France’s CAC 40 index slid 2%. “The resignation plunges France towards the unknown,” said Luigi Buttiglione, founder of LB Macro. “The French economy is poised to suffer from the unavoidable further loss of confidence by the business sector, thus impacting activity in the whole EU given the weight of France.”

Lecornu’s resignation followed President Emmanuel Macron’s decision to keep a nearly unchanged cabinet, which drew backlash from both opposition parties and his own supporters.

France’s credit standing has already taken hits.

Moody’s has the country at Aa3 with a stable outlook, due for review on October 24. S&P holds an AA- rating with a negative outlook, with another review expected November 28. Both reflect worries over persistent deficits and political uncertainty.

India’s bond market closed the week quietly. The 10-year 6.33% 2035 yield ended at 6.5114% on Friday, almost flat compared to the prior week. But the coming quarter is expected to bring relief. Indian states will borrow 2.82 trillion rupees ($31.76 billion) between October and December, far less than market estimates.

The surprise borrowing plan eased fears of heavy issuance after the central government cut ultra-long bonds from the auction schedule.

Traders now expect the 10-year benchmark yield to stay within a 6.47% to 6.52% range. Optimism has grown after the Reserve Bank of India left its policy rate unchanged. Governor Sanjay Malhotra said there was still room for the 10-year yield to fall, a remark that steadied sentiment going into the final months of the year.

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